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May 2017

HG Metal Manufacturing Limited

Cash Rich Steel Player with Multiple Catalysts
Trading at a Fire Sale Discount of ~60% to NAV
Significant Upside Opportunity of >40% by 2018

Please email questions and comments to:

Jan F. Moermann
Havard Chi
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Quarz Capital Management

HG Metals Board can Increase Shareholder Value by >40%

The HG Metal Opportunity
3 Key Business Areas
HGs BRC Asia Equity Stake
Analysis of Shareholder Base (BRC Asia)
Trading Division
Manufacturing Division
Key Reasons for Undervaluation
Quarz Recommendations for HG Metal
Potential Total Return for HGs Shareholders
Analysis of Shareholder Base (HG Metal)

Source: Quarz Capital Management, HG Metal Manufacturing Limited

Quarz Capital Management
HG Metals Board can Increase Shareholder Value by >40%

In Summary:
We believe that HG Metals substantial undervaluation costs shareholders >40% of equity value
HG has persistently traded at sharp discounts of 20% and 35% to SGX listed peers in the steel trading and
manufacturing businesses1
HGs intrinsic book value (comprising mostly liquid assets) at SGD 0.867/share is 150% higher than its current
share price of SGD 0.350 (~60% discount to NAV)
Investors 1.) lack confidence in the long term profit sustainability of HGs Trading Division, and 2.) clarity on the
allocation of the substantial net cash of SGD 29m and the stake in BRC Asia valued in excess of SGD 30m (vs. Mkt
Cap of SGD 45m)
We believe that the board can and should do more to increase shareholder value

We recommend the following actions for HG Metal:

Full strategic review on the potential divestment of major 22.6% stake in BRC Asia (non-core to HG).
Divestment can potentially yield > SGD 30m of proceeds (~67% of Mkt Cap). Multiple buyers have indicated interest in
the stake. Part of proceeds can be returned as dividends to shareholders
Immediately distribute SGD 10m as a special dividend (Dvd Yld of ~23%) to shareholders. HG will retain more
than sufficient net cash of SGD 19m to invest and execute on strategic projects
Scale down or spin off HGs Trading Division - reallocate capital to higher return business activities
Establish the Manufacturing Division as HGs core business and expedite on further investment to strengthen
the capabilities of this business
Provide clarity of the allocation of excess capital of ~SGD 50m (~110% of current Mkt Cap) forecasted net
cash balance following the implementation of Quarzs recommendations
1- Steel Traders Hupsteel, Asia Enterprise, Steel Manufacturers Lee Metal, BRC Asia
Source: Quarz Capital Management, HG Metal Manufacturing Limited
Quarz Capital Management
The HG Metal Opportunity - 1/4

The HG Metal Opportunity:

4th largest listed steel player in Singapore (by revenue), founded in 1971
2 main divisions: Steel Trading/Distribution and Manufacturing
Market Cap has slumped by ~60% and underperformed its sector since
2014 due to weak profitability in Trading/Distribution.
Falling steel price resulted in heavy write-down of inventory and
depressed margin
HGs share price has over-corrected and trades at a heavy discount to its
NAV which comprises of mainly liquid assets and a strategic 22.6% stake
in BRC Asia
Stabilising steel price to further improve the overall profitability of HG
Breakdown of Assets Key Statistics
Last Price SGD 0.350
Cash 52-Week Range1 SGD 0.26 0.45
23% Shares Outstanding2 127.4m
Market Capitalization SGD 44.6m
Gross Asset Value1,3 SGD 130.4m
Enterprise Value1,2,3 SGD -13.6m
Stake in NAV/Share SGD 0.867
Trade Receivables BRC Asia Discount to NAV 59.6%
33% 23%
Dividend/Yield 0.005 / 1.4%
1) Bloomberg data as of 30 May 2017
Total Assets: SGD 130.4m 2) Based on HG Metals FY1Q2017 (end Dec) Annual Report
Total Liabilities: SGD 19.9m 3) Based on QCM estimates and HG Metals FY1Q2017 (end
Dec) Annual Report
Source: Quarz Capital Management, HG Metal Manufacturing Limited
Quarz Capital Management
The HG Metal Opportunity - 2/4

HGs share price has slumped by ~60% in parallel with falling steel price
Steel Price Benchmark (China Hot Coiled Steel Price/tonne) in
ORANGE indexed to HG Metals Share Price of SGD 0.77

HG raised SGD 14.7m @ Cancellation of JV

SGD 0.69/share through Strong positive correlation and capital raising
the placement of shares to in prices of steel and HGs exercise due to
SEAVI Advent (10.3% share has diverged since weaker economic
stake) and Aung Tin Htut the start of 2016 environment in
(6% stake) Myanmar

divergence in
Flame Gold of HGs share
(controlled by Foo and steel
Sey Liang and Tee Ching exited HG prices
Wee Sian) became through the complete Discount to
HGs biggest sale of his stake in close?
shareholder by Flame Gold to Foo
purchasing a 26%
stake from Oriental HG announced that it will invest USD 30m for a
Castle at SGD controlling stake in a 40:60 JV with U Yang Ho to
0.95/share. Ching construct a steel manufacturing and fabrication plant in
took up a majority Myanmar. U Yang Ho will invest SGD 10m @ SGD
stake in Flame Gold 0.42/share in HG (stake of 16.5%) and USD 42m in the
in early Apr 2014 JV

Source: Bloomberg, SGX, Quarz Capital Management, HG Metal Manufacturing Limited

Quarz Capital Management
The HG Metal Opportunity - 3/4

HG Metal Trades at a Fire-sale Discount to its NAV

110 Share price trades at ~60% discount to
SGD 30m

Upside of EXCESS CAPITAL Current Mkt Cap
Net cash and stake
~150% in listed BRC Asia

to Mkt valued at ~SGD
60m (~130% of Value of Operating NAV
Cap Mkt Cap)
SGD 29m (Inventories + Working Capital + PPE)
SGD million

In addition, Investors receive:
SGD 14m
Value of 1. SGD 29m of net cash
30 NAV 2. Strategic 22.6% stake in BRC Asia with
Price @ ~ SGD 52m SGD 25m
SGD Mkt Cap
(115% of estimated value of SGD 30m
20 0.350 SGD 45m
Mkt Cap)

SGD 13m

Total NAV >250% of HGs Current
Current Mkt Cap HG's NAV Market Cap
PPE Receivables - Payables Inventories Net Cash Stake in BRC Asia

Source: Quarz Capital Management, HG Metal Manufacturing Limited

Quarz Capital Management
The HG Metal Opportunity - 4/4

HGs share price has tremendous upside opportunity when compared to

its NAV and potential catalysts +150% - Current NAV / Share of
0.80 Average trading price at substantially higher SGD 0.867
level of >SGD 0.75 prior to Jan 2015 (NAV = SGD 111m)



0.60 >40% - Potential total return based

on the execution of Quarz
0.55 recommendations

0.50 Divergence in +25%

performances -5 to +15% - Potential range of
total return without

catalysts / normalised

0.35 Quarz recommendations can lead to:

1) pay out of part of the excess capital
0.30 to all shareholders,
2) Solidify HGs L-T growth and
0.25 business model, and
Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18
HG Metal Steel Traders Steel Manfacturers 3) significant rerating of HGs
Source: Quarz Capital Management, Bloomberg, HG Metal valuation, (in line with sector)
Quarz Capital Management
3 Key Business Areas

HG Metal
Manufacturing Limited
(Listco on SGX

HG Metals
Oriental Metal Jin Heng Li PT HG Metal
Investments POS-SEA Pte. Ltd.
Pte Ltd Hardware Sdn Bhd 32.5%
Distribution Indo
Pte. Ltd. 79.4% 100%

HG Metal
HG Construction Niho (Singapore) HG Yangon
Manufacturing HG Metal Pte. Ltd.
Steel Pte. Ltd. Pte. Ltd. 100%
Company Ltd
Sdn Bhd 100% 100%

HG Metal
BRC Asia Ltd
Distribution Sdn
(SGX Listed)
Bhd 22.6%

Investment / Stake in BRC

Steel Manufacturing Division Trading Division

Source: Quarz Capital Management, HG Metal Manufacturing Limited

Quarz Capital Management
HGs BRC Asia Equity Stake
Overview / Performance:
HG is the 2nd biggest shareholder in BRC Asia with a strategic 22.6% stake
BRC is one of the top 3 manufacturers of reinforcing steel products for the SG construction
industry dominating ~35% share of the customised wire mesh market
Competitive cost advantage driven by expertise and investment in a highly automated
manufacturing process
Products focused on improving construction productivity and fast turnaround time
Weak earnings in 2015-2016 attributed to sluggish construction demand

Outlook / Longer Term Consideration:

Current market value of HGs BRC Asia stake at SGD 30m (~66% of Mkt
Net Income (SGDm)
Value of stake to rerate from 2018 onwards driven by increasing 40

profitability at BRC Asia NI currently

at trough
Forecast NI to stabilise and rerate post 2018 driven by improving construction activities Level
Leveraged to the increasing use of off-site pre-fabricated steel products attributed to
emphasize on reducing of labour input (improving construction productivity) 25

Trades at attractive P/B and P/E of 0.65x and 12.0x with dividend yield of 3.4%. 20

Multiple buyers have indicated strong interest in HGs stake in BRC: 15

Increase market share to consolidate the industry 10

Strengthen shareholding control of BRC Asia
Strategic partner and platform to the SG construction market to
introduce high value added metal products 2009 2010 2011 2012 2013 2014 2015 2016

Source: Quarz Capital Management, HG Metal Manufacturing Limited, BRC Asia Limited
Quarz Capital Management
Announcement by BRC Asia on 30 May 2017

Clear interest in
the BRC Asia stake
from investors

HG Metal
shareholders need
to understand
stance of company
on this stake

Clear action &


Source: Quarz Capital Management, BRC Asia Limited

Quarz Capital Management
Analysis of Shareholder Base (BRC Asia)

Lingco Marine / Holding is the biggest shareholder of BRC. Lingco was Shareholding Level
previously a major shareholder of HG Metal where it removed the latters board
in a boardroom tussle in 2009. Lingco purchased its BRC shares from HG
Metal when HG went into financial difficulties subsequently. Lingco
Mr. Sia Ling Sing (aged 72), the majority shareholder of Lingco is the current Free Float Marine/Holding
non-executive Chairman of BRC Asia.
29.2% 26.8%
HG Metal owned >70% of BRC Asia in 2008 due to a tender offer. It had to
reduce its stake in BRC to lower its leverage. The company is represented on
BRC Asias board by Mr. Foo Sey Liang

Sin Teck Guan was a previous shareholder of HG Metal in 2009 and

purchased its stake in BRC Asia from the latter. The company is represented HG Metal
on BRC Asias board through non executive director Mr. Lau Eng Tiong
Sin Teck Guan wholesales and rents construction equipment such as cranes
and trucks Siem Seng Hing

Lim Siak Meng (age 66) has been the CEO of BRC Asia since 1992. 6.3%

Siem Seng Hing is a building material supplier. It is not represented on the Lim Siak Meng Sin Teck Guan
board of BRC.
6.7% 8.5%

Any one of BRCs current significant shareholders could establish a near

majority control of the company with the purchase of HGs stake (and a
proportion of additional market purchases)

Source: Quarz Capital Management, HG Metal Manufacturing Limited, Bloomberg

Quarz Capital Management
Trading Division
Overview / Performance: Revenue by Region (%)
Accounts for 85% of total revenue but 0% of total profit
Distributes steel products for construction, shipping and industrial requirements
Successfully ramped up business in Myanmar over the last 2 years 34%
Profitability hit by inventory write-down and margin compression due to falling steel prices
Management has been executing cost reduction measures to lower cost base
Division near profit breakeven in 2H16
Stabilising / Increasing steel price Positive profitability with improved margins
forecasted in 2H17
Longer Term Consideration: 7%
Division should be scaled back and focus on distributing higher margin
EBIT Margins (%)
and complementary products (with the manufacturing business) 8
Asset intensive business with low ROE low entry barrier and fragmented market
Low returns/margins despite added risk of distribution in Myanmar 2
Trading Margins have been consistently weaker than peers
Business model lacks long term sustainability: -4 HG has
Increase in direct sourcing of steel products from steel mills and distributors in China -6
weaker trading
attributed to improved accessibility and shortened lead time -8
margin vs
SG steel manufacturers/fabricators providing sourcing of steel products as a
complementary service to clients
Strategic move to scale down business can release capital of SGD 10 - -16
2012 2013 2014 2015 2016
15m currently utilises ~SGD 50 million of capital (110% of Mkt Cap)
HG Metal AEH HupSteel**

Source: Quarz Capital Management, HG Metal Manufacturing Limited

Quarz Capital Management
Manufacturing Division
Overview / Performance:
Fabricates reinforcing steel products mainly for the SG construction industry (cut & bend, cage
& rebar and steel finishing (galvanising, threading, cutting and drilling))
Leading reinforcement and customised steel bar supplier for usage in roof support for
industrial and commercial buildings in Singapore
HG was a late entrant but has established strong expertise in this business
Division has been profitable since 2015 and accounts for entire profit base of HG
Earnings to trough in 2016-2017 and recover thereafter supported by the frontloading of
infrastructure projects in SG

Longer Term Consideration:

HG should expedite on investing and building up the capabilities of its
Manufacturing Division
Improving construction activities as SG RE supply is absorbed (post 2018)
Leveraged to structural growth in profitability: Improving
Higher min content of pre-fabricated steel products mandated by BCA to increase 2.0 profitability
construction productivity following steep
1.5 learning curve
Increased labour cost (MOMs reduction in sector dependency ratio, increased
foreign worker levy, and requirement for proportion of higher skilled labour) to 1.0
increase demand and proportion of pre-fabricated product
Low risk of foreign competition due to inefficiencies of transporting pre-fabricated and
finished steel products 0.0

Division should emphasize on adding products and services which can -0.5
leverage on the governments emphasize on improving construction
productivity -1.0
2011 2012 2013 2014 2015 2016

Source: Quarz Capital Management, HG Metal Manufacturing Limited

Quarz Capital Management
Key Reasons for Undervaluation - 1/3

Items / Comments:

Stake in BRC Asia

Lack of clarity on the strategic 22.6% stake in BRC Asia (estimated value of SGD 30 m (~66% of Mkt Cap)
Trading Division
Turnaround in profitability from 2H17 although division will continue to suffer from low returns on capital
despite the additional risk of distribution in Myanmar
Unit requires substantial allocation of capital to operate
Lack of competitive advantage reduces investors confidence in the long term profit sustainability of the
Strategy HGs margin has been consistently lower than peers
Concern that further capital from net cash holdings might be deployed to fund the business (Cash position
decreased from SGD 37m to SGD 30m from 4Q16 to 1Q17 to fund trading business)

Manufacturing Division
Lack of understanding on managements strategy for the division

Excess Net cash Holdings

Lack of clarity on the use of SGD 30m (~66% of Mkt Cap) of cash position (exploring opportunities)
Lack of clear dividend and capital return strategy

Weak Investor Relations

Lack of sell side coverage
Communication Investors lack understanding on drivers of HGs business and managements strategic plans
Negative feedback loop of low liquidity due to lack of understanding results in further lowered investors

Source: Quarz Capital Management, HG Metal

Quarz Capital Management
Key Reasons for Undervaluation - 2/3

Weakness in HGs Profitability has increased Investors Scepticism and

the Discount of HGs Mkt Cap to its NAV
Net Income (SGDm) Mkt Cap vs NAV (SGDm)
4.0 Increase in
Discount to NAV
25% 38% 25%
-2.0 100

80 55%
-6.0 60%
-8.0 Lack of consistency 60
in profitability
-10.0 mainly due to the
trading division


-18.0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Curr
End Yr Mkt Cap NAV

Source: Quarz Capital Management, HG Metal Manufacturing Limited, Bloomberg

Quarz Capital Management
Key Reasons for Undervaluation - 3/3

Maintenance of Extraordinary High Level of Net Cash Can Lead to

Inefficient Allocation of Capital

HGs extensively renovated and award winning minimalist HQ completed in 2014/2015

while shareholders endured SGD 16.8/5.6m of losses in 2014/15 and a 60% slump in
the value of HG shares

Source: Quarz Capital Management, HG Metal Manufacturing Limited

Quarz Capital Management
Quarz Recommendations for HG Metal

Items / Comments
Stake in BRC Asia
Company should indicate willingness to divest and consider bids for its strategic stake in BRC Asia (but
non-core to HG Metal) at the appropriate price.
Part of sales proceeds (total estimated at >SGD 30m, ~66% of Mkt Cap) can be returned to shareholders
Trading Division
Scale back on the trading of low margin steel products
Focus on products which can be cross sold with products from the Manufacturing Division
Provide clear ROE target for this division with risk adjustment factored in for distribution in countries with
different risk profiles
Strategy Excess capital released (SGD 10-15m) to be reinvested in expanding Manufacturing Division

Manufacturing Division
Establish this segment as the core business of HG Metal
Invest SGD 20m (SGD 10-15m from trading division) to further strengthen the capabilities of this division
Evaluate and grow in niche areas which are leveraged to improving construction productivity

Excess Cash Holdings

Immediate distribution of SGD 10m of excess cash to yield a dividend of ~22%
Commit to pay out at least 30% of NI as dividend yearly (company still retains excess cash balance of SGD
15m after committed investment in Manufacturing Division)

Improve Investor Relations

Communication Increase the quality of reported information on the operations of the company (presentations)
Increase coverage by sell-side analysts

Source: Quarz Capital Management, HG Metal Manufacturing Limited

Quarz Capital Management
Potential Total Return for HGs Shareholders
>40% Upside Potential With Implementation of Quarz Recommendations

1. Return of SGD 10m of excess capital

to provide initial dividend pay-
0.500 Discount to NAV
to decrease to
out/upside of ~20%. HG still retains
~40% SGD 20m of capital to execute on
SGD 0.103 future projects
0.450 Upside in 2. Discount to NAV to decrease to 40%
excess following improved understanding of
of 40% the intrinsic value of HG Metal (focus
on Manufacturing as core business,
Dividend Yield scale down and release of capital
of ~22%
from Trading Division)
SGD 0.078
3. Potential mid and long upside driven

SGD 0.1815
Divestment of non-core stake in
NAV of SGD0.867/share (~49% short to mid BRC Asia,
(>250% Mkt Cap) term upside) Increased profitability of
mainly comprised of Manufacturing segment
liquid assets to protect
Future release of excess capital
through the implementation of
clear capital pay-out strategy
Current Share Price Extraordinary Lower Discount to Total Upside
Dividend NAV

Source: Quarz Capital Management, HG Metal Manufacturing Limited

Quarz Capital Management
Analysis of Shareholder Base (HG Metal)

Description of Shareholder Base

Mr. Foo Sey Liang is the is the largest shareholder of HG Metal (through
Flame Gold). He is an Executive Director of HG Metal and assumes
overall daily operational responsibility and executes on strategic plans of
HG Metal (akin to a CEO role). He is currently a non-executive director at Shareholding Level
BRC Asia, Unicos Tech and Visworx. He was previously a director at
Oasis Logistics
Foo Sey Liang
SEAVI Advent Investments is owned by SEAVI Advent Equity VI and
Ocean Private Equity III funds which are managed by SEAVI Advent SEAVI
Corp. Tan Keng Boon (managing director of SEAVI Advent) and Teo Yi-
Dar (investment director at SEAVI Advent) are HGs Chairman and Free Float
Director. SEAVI has invested and IPO-ed a no of companies such as Investments
Yangzijiang, Sunvic Chemical, Sin Heng Heavy Machinery, and Dynamic 10.5%

Chye Hin

Chye Hin Hardware is structural and mild steel supplier in Singapore. Hardware, Yap
The company is 33.3% and 25% owned by Yap Xi Ming and Tan King and Tan
Aung Tin Htut
Seng respectively. Both also holds direct stakes in HG Metal. Chye Hin 7.5%
Hardware is not represented on HGs board of directors 6.3%

Mr Aung Tin Htut is deemed to be interested in the stake held by Rise

Capital Ventures Ltd. Aung is not represented on HGs board of directors

~54% of total shares are in free float

Source: Quarz Capital Management, HG Metal Manufacturing Limited, Bloomberg

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